2025: The challenge of balancing risk and return

Effectively balancing risk and return will be the key to success in the capital markets of 2025
The US shows strong short-term economic prospects, while Europe faces instability
Asian markets have varied opportunities, with India showing potential growth and China in a transformative phase

In 2025, balancing risk and return will be a key theme for capital markets. While BEA Union Investment believes markets still present investment opportunities, the diverging global macroeconomic landscape and the 'Trump Factor' could create undercurrents across markets. As such, investors should adopt a prudent stance. By effectively managing and diversifying risk, we believe this will be a year in which opportunities continue to outweigh risks.

Evaluating capital markets from a macro risk perspective

Given the resilience of the US economy, the short-term outlook for US stocks and bonds is preferred by our teams. Germany and France are beleaguered by political instability and stagnant growth. The UK economy also remains lacklustre, but on a positive note, its financial industry remains sound, benefiting certain bonds, such as those issued by banks. In Asia, a divergence in macroeconomic conditions opens up opportunities for corporate bond investments across markets, while the region's stock valuations remain considerably reasonable. India continues to offer structural growth potential, while China is still navigating a transitional phase, with investors closely monitoring its impending rescue package.

US economic indicators remain strong across multiple fronts, recording solid growth in the economy, productivity and retail sales, while the labour market stays resilient. Trump's 'America First' ideology will likely support US equities in the near term, although the medium- and long-term outlook remains uncertain. His deregulation plans will be a boon to sectors such as banking and AI. While significant tax cuts could spur consumption and investment, they also risk exacerbating the already sky-high deficit, potentially leading to increased US Treasury issuances. US inflation has been steadily easing, but the decline has plateaued. Should Trump follow through on his pledge to substantially raise tariffs, inflationary pressures could rekindle, possibly disrupting policies of the US and other markets.

Policies are another key parameter in assessing risk, as fiscal and monetary policies influence interest rates, currencies, and both consumer and business confidence. Take China, for instance: the ability to reignite investor confidence in Chinese assets primarily hinges on the scale of its rescue package. In an effort to bolster its economy, the Chinese authorities have indicated that they will adopt an expansionary fiscal policy and shift to a "moderately loose" monetary stance, although details remain scarce. However, if the gap between US and Chinese monetary policies continues to widen, a stronger greenback could diminish the appeal of Renminbi-denominated assets. At the same time, higher tariffs could take a toll on Chinese exports, leading to greater reliance on policy measures to offset some of these effects. In Japan, the economy and wages continue to grow, and the country is gradually normalising its monetary policy. However, the trajectory remains unclear, which could lead to volatility in the Japanese yen, and in turn, affect stock market performance. The Bank of Japan has finally announced a rate hike. However, if the divergence between US and Japanese monetary policies remains substantial, the risk of another yen carry trade unwinding that triggered last year's market turbulence cannot be ruled out.

Achieve a better optimised risk-return profile with a multi-asset strategy

Financial markets are closely interconnected, and with Trump back in the office, his policies are expected to introduce uncertainties to the global economy. In pursuit of capital growth amid a shifting market landscape, investors can determine the risk level by first assessing macroeconomic parameters, such as growth, employment, retail sales, liquidity, inflation, and policies, before evaluating asset classes for allocation. Staying invested in 2025 by controlling risks could be key to optimising investment portfolios.